Author

Anthony SpecaPublic policy professional focused on the politics and economy of the Arctic, especially the Canadian North. Once a senior policy official in the Government of Nunavut, now Managing Principal of Polar Aspect.

Political vision and fiscal reality in Canada’s North

The fiscal relationship between Ottawa and the three Northern territories will reach a crossroads in little more than a year, when the current federal-territorial fiscal arrangement—known as Territorial Formula Financing (TFF)—comes up for renewal. The territories depend profoundly upon TFF to fund their development, and Ottawa points to it as the principal financial contribution toward its vision of a North of self-reliant individuals, healthy communities and responsible governments. Yet it is unclear whether TFF even covers the extraordinary costs of providing public services in the territories, let alone the costs of realizing Ottawa’s vision. Nowhere is this less clear than in Nunavut, where experts have called into question the adequacy of federal support. Will Ottawa take the upcoming TFF renewal as an opportunity to dispel doubts that its aspirations for the North exceed its willingness to pay for them?1

The last time that Ottawa seriously examined where the North fits into Canadian fiscal federalism, it received stern advice from former NWT Premier George Braden. It was the summer of 2005, and Ottawa’s fiscal position was enviably sound. Thanks to a successful austerity drive in the 1990s, followed by a global economic boom in the 2000s, it had eliminated chronic federal deficits, reduced the national debt and amassed a cumulative surplus of about $60 billion. But the provinces and territories—apart from resource-rich Alberta—were projecting an aggregate deficit well into the future.2 With the fiscal fabric of Confederation stretching uncomfortably, Ottawa had convened an expert panel under the chairmanship of Al O’Brien, a former Deputy Treasurer of Alberta, to sort out the issues. The O’Brien Panel was to recommend reforms to Ottawa’s fiscal arrangements with the provinces and territories within a year.

Braden, who had helped shepherd the NWT into fully responsible government and then went on to serve as its first premier, received an early invitation from the O’Brien Panel to express his views on how it should approach its commission with respect to the territories. He cautioned the O’Brien Panel that the primary problem with the federal-territorial fiscal relationship lay not in the details of the existing federal transfer program—known as Territorial Formula Financing (TFF)—but rather in the lack of a federal vision for the Canadian North:

TFF arrangements with the territories are a means to an end. The federal government needs to make decisions on where it wants to take the territories over the next twenty-five years. Without a vision, decision-making on TFF arrangements and a lot of other key issues … will be ad hoc at best.3

Essentially, Braden was reminding Ottawa that even though it had devolved most provincial-level powers to the territorial governments, they continued to depend on federal support to exercise those powers effectively in pursuit of their social and economic goals. It was not enough for Ottawa to provide the territories with TFF, which then as now accounted for over 60 percent of government revenues in Yukon and the NWT, and about 80 percent in Nunavut. Ottawa also needed a clear sense of where the territories should be going, and how TFF would help them get there. As Braden put it:

I think the point to make to the federal government is that while it can consult with and jointly plan with the territories, it also needs to accept that it has major responsibilities and must make decisions about the future of the territories. Adjustments to the existing TFF arrangements in the absence of fundamental decisions will not produce lasting solutions.4

Yet Ottawa had already committed to reforming TFF once the O’Brien Panel had reported, leaving very little time both to restore the fiscal balance of Confederation and to conjure up a long-term federal vision for the North.5 Nevertheless, Braden urged the O’Brien Panel not to “try to create the blueprint” for a new TFF arrangement. “Your panel can make brilliant recommendations on new TFF arrangements for the territories; however, it is unlikely they will have much effect given the current approach to the territories in the federal administration,” he warned. Instead, Braden suggested that the O’Brien Panel recommend to Ottawa that it structure new financing arrangements for each territory separately, but only after having developed its overall vision for the North and reorganized its administration to realize that vision effectively.6

This the O’Brien Panel did not do. Its mandate was to recommend feasible improvements to TFF, and it probably did not wish to suggest that Ottawa was merely tinkering with the details of a fiscal system whose ultimate purpose it had not yet fully worked out. Moreover, the three territorial governments had already notified the O’Brien Panel that they expected immediate change. They had made it clear that they considered TFF inadequate to meet their fiscal needs, and that they were dissatisfied with Ottawa’s previous round of TFF reforms, which had capped the total TFF envelope and forced them into a zero-sum allocation game that undermined the predictability and stability of their budgets.7 In 2006, mindful of both its mandate and the territories’ concerns, the O’Brien Panel delivered a blueprint for a more adequate, predictable and stable TFF arrangement. Ottawa instituted this arrangement in 2007, and it remains in place today.

In little more than a year, however, this arrangement is due for review and renewal. When Ottawa enacted it, the economy was growing and the federal budget was in surplus. Since then, the recent global financial crisis has thrown Ottawa back into deficit. Having legislated the current TFF arrangement through to 2013-14, Ottawa has been somewhat bound by it. Although it seems unlikely that Ottawa would simply abandon the O’Brien Panel’s reforms—it has so far spoken only of completing a joint federal-territorial “review of the technical aspects of … TFF”—it will probably take the renewal as an opportunity to review its fiscal relationship with the territories in light of its current attitude of fiscal restraint.8

Perhaps no less importantly, the upcoming TFF renewal also presents an opportunity for Ottawa to revisit Braden’s advice. Was he right that Ottawa lacked a clear vision for the North, and that the O’Brien Panel reforms would be “ad hoc at best”? Is TFF still inadequate for any lasting solutions to the considerable social and economic challenges in the territories? And what about the vision for the North that Ottawa published in 2009—what does it have to say about the place of the North in Canada’s fiscal federation, and about the best way to finance the development of the territories?

Political vision without fiscal reality

In 2007, shortly after Ottawa adopted the O’Brien Panel reforms, the three territorial premiers published their own vision for the North. With its very title, A Northern Vision: A Stronger North and a Better Canada, the premiers announced the North as an integral yet special part of the nation. They described the North as “one of the pillars on which Canada has been built,” and they vowed to work together to develop it not only for the benefit of Northerners, but also in a way that “contributes to the well-being of all Canadians.” The premiers envisaged a North where “self-reliant individuals live in healthy, viable communities,” where “strong, responsible governments make decisions and take action,” and where “the territories are strong contributing partners in a dynamic and secure Canadian federation.”9

But on the subject of how this nation-building territorial development was to be financed—and particularly how the fiscal relationship with Ottawa should support it—the premiers were silent. Perhaps satisfied with the work of the O’Brien Panel, they did not discuss TFF at all in their vision document. They also did not offer any more general observations on federal funding for the territories.

Whether or not Ottawa took the premiers’ silence as a cue, it followed a similar pattern when it unveiled its vision for the North two years later. In keeping with the title, Canada’s Northern Strategy: Our North, Our Heritage, Our Future, Ottawa called Canada “a Northern nation,” and the North “a fundamental part of Canada.” Echoing the territorial premiers closely, Ottawa looked forward to a North in which “self-reliant individuals live in healthy, vital communities, manage their own affairs and shape their own destinies,” and in which “strong, responsible, accountable governments work together for a vibrant, prosperous future for all—a place whose people and governments are significant contributing partners to a dynamic, secure Canadian federation.”10 But on the subject of how to finance these healthy communities and responsible governments—and especially how the territories fit into Canadian fiscal federalism as contributing partners—Ottawa offered nothing more than the status quo.

Unlike the territorial premiers, Ottawa did at least mention TFF in Canada’s Northern Strategy. It reminded readers that it devoted “significant financial resources to territorial governments through Territorial Formula Financing in recognition of the unique issues faced by Northern governments,” amounting to a total of “almost $2.5 billion … which enables territorial governments to fund programs and services such as hospitals, schools, infrastructure and social services.”11 But this impressive-sounding sum—which has grown to $3.1 billion in 2012-13—means little without any accompanying context explaining how much public services and infrastructure in the North actually cost. Rather than provide this context, Ottawa simply left unanswered the question of whether or not the existing TFF arrangement could possibly suffice to help realize the vision for the North that it set out.

Similarly, Ottawa advertised but did not contextualize the additional funding that it provides to the territories for special purposes. Some of this funding flows through national programs, such as the Canada Health Transfer, the Canada Social Transfer and limited “trust funds” for various issues, which Ottawa generally allocates among provinces and territories on a per-capita basis. With the territories accounting for just 0.3 percent of Canada’s population, these funding streams pale in comparison to TFF. Other special-purpose funding, such as $300-million for the Northern Housing Trust or $40-million for a small-craft harbour in Pangnirtung, is also much smaller than TFF, despite its importance for individual projects. In any case, Ottawa did not explain in Canada’s Northern Strategy how this additional funding complements TFF in a way commensurate with Ottawa’s vision for the North.

In his introduction to Canada’s Northern Strategy, then Minister of Indian and Northern Affairs Chuck Strahl claimed that Ottawa was “allocating more resources and attention to Northern issues than at any time in our country’s history.”12 And yet, despite the publication of two visions for the North in the years since Braden warned that one was lacking, Ottawa seems no closer to articulating exactly how these unprecedented resources add up to a coherent and comprehensive fiscal plan. Perhaps for this reason, Ottawa’s follow-up to its vision, entitled Achievements under Canada’s Northern Strategy, 2007-2011, resembles a budget-day pamphlet touting spending initiatives more than it does an interim report benchmarking progress towards future goals.

The inadequacy of federal financing for the North

The disconnect between Ottawa’s vision for the North, and the fiscal mechanisms in place to achieve it, raises the question of whether TFF is adequate to meet territorial spending needs. Neither Ottawa nor the territories have quantified these needs in terms of how much their visions for the North would cost. However, even on more fundamental terms—namely, the constitutional principle that Canadians everywhere should enjoy “reasonably comparable levels of public services at reasonably comparable levels of taxation”—there is reason to believe that TFF falls short of its purpose.13

Put simply, TFF is an annual, unconditional federal grant that fills the gap between a territory’s expenditure needs and its own-source revenue capacity. Each year, Ottawa makes up the difference between what the territories must spend to provide their residents with reasonably comparable public services, and what they can raise in revenues from their own tax base at reasonably comparable tax rates. In order to avoid giving the territories an incentive not to raise revenues at all, Ottawa calculates revenue capacities by modelling what the territories could raise from their actual tax bases if they were to levy taxes at national average rates. A version of this revenue model forms the core of the provincial Equalization program, and its methodology is very detailed.

By contrast, Ottawa’s understanding of the territories’ expenditure needs is much less well developed. Its measure of need—known as the Gross Expenditure Base (GEB)—derives in large part from the actual spending that Ottawa’s northern commissioners approved for Yukon and the NWT in 1982-83, with adjustments over time for growth in population and in average spending by southern provinces and municipalities. Nunavut’s GEB derives in turn from the NWT’s, after a boost to account for the diseconomies of scale associated with running two governments for the same area and population.14 Since establishing the original GEBs in 1985, Ottawa has increased them from time to time, typically by tacking on federal spending for programs devolved to the territories. But it has also capped and cut them to suit its own fiscal purposes, as it did during its austerity drive in the 1990s.15

Ottawa’s method of computing territorial expenditure needs by historical proxy raises an immediate question about adequacy. Considering that the territories simply could not function without TFF, and that Ottawa strictly limits how much they can borrow to augment it, the fiscal health of the territories depends greatly on the accuracy of their GEBs. But do the GEBs measure what each territory truly needs to spend to offer comparable public services, or more what Ottawa is actually willing to spend? The various changes applied to the GEBs over time—especially the caps and cuts of the 1990s, which put Ottawa’s fiscal needs ahead of those of the territories—muddle the issue further. Even presuming that the original GEBs were once a reasonable measure of territorial expenditure needs, have they kept pace with changes since 1985?

At the time the O’Brien Panel began its initial consultations, there had been no independent, systematic review either of the GEBs, or of TFF as a whole, in two decades. Noting that “TFF relies on a ‘snapshot’ of territorial spending in 1982,” the O’Brien Panel acknowledged that “it is not obvious that the result is an accurate depiction of today’s needs.” For this reason, Ottawa explicitly instructed the O’Brien Panel to study “the evolution of the costs of providing services in the North,” and to examine whether the current approach to measuring territorial expenditure needs “should be improved, updated or even replaced.”16

Some observers did call for it to be replaced. Richard Zuker and Russell Robinson, who submitted perhaps the most detailed analysis of the adequacy of TFF to the O’Brien Panel, argued that the GEBs no longer represented anything meaningful, if ever they did. In their view, after two decades of ad hoc manipulation, the GEBs had outlived their usefulness. Zuker and Robinson showed in particular that if the GEBs correctly measured spending needs, it would imply that public demand for government services in Nunavut was only nine percent higher than in the NWT. Considering Nunavut’s lagging social and economic indicators even relative to its territorial peers, Zuker and Robinson concluded that this result was “highly problematic” and “strongly suggests that the GEB for Nunavut is too low.” They went on to recommend that, rather than try to repair the existing GEBs, the O’Brien Panel advise Ottawa to establish an independent body to develop realistic estimates of territorial expenditure needs.17

The territorial governments themselves also complained to the O’Brien Panel that the lingering effects of the caps and cuts of the 1990s had opened an “adequacy gap” in their GEBs. They estimated this gap had widened year by year, to the point that it was costing them $221 million collectively in 2005-06 alone. But in addition to the overall adequacy of TFF, the territorial governments were concerned about its predictability and stability, which Ottawa’s previous round of TFF reforms had upset. Perhaps suspecting that Ottawa was unlikely to meet their full set of demands, they went so far as to confirm to the O’Brien Panel that their original GEBs had been adequate at the time, and that it would be enough to close the gap they had identified. Even Nunavut subscribed to this position, despite the fact that it did not exist when Ottawa established the original GEBs—and despite Zuker and Robinson’s contrary conclusions.18

For its part, the O’Brien Panel seems to have made a real effort to address the territories’ concerns. Its blueprint for a new TFF arrangement involved increasing the territories’ GEBs by an aggregate $200 million, which it believed would “go a long way to accommodating the territories’ concerns about the adequacy of TFF.”19 It also recommended reforms to increase predictability and stability. At the same time, the O’Brien Panel rejected Zuker and Robinson’s recommendation that Ottawa conduct a comprehensive study of territorial expenditure needs. It questioned whether such “complex, costly, and time-consuming … work would result in any better measures of what the territories need than a combination of history, political judgments, and proxy measures.”20

Nevertheless, the O’Brien Panel issued Ottawa a direct challenge:

While the Panel does not recommend an extensive study of expenditure needs in the territories … the case for assessing expenditure needs in Nunavut is substantially different. … When Nunavut was established as a territory on April 1, 1999, TFF funding was not designed (nor was it adequate) to address existing deficiencies in health, housing, education, and social infrastructure, programs, and services. The Panel’s recommendations on TFF are intended to provide adequate funding for all three territories … However, these adjustments do not sufficiently address the challenges and gaps in Nunavut. For that reason, the Panel recommends that further work be done to assess expenditure needs in Nunavut as a starting point for addressing those needs on an urgent basis. This study could provide a template for reviewing expenditure needs and costs in the other territories in the longer term.21

This forthright recommendation, which echoed a similar recommendation already made by the Council of the Federation, did not translate into action in Ottawa.22 While Ottawa implemented the O’Brien Panel’s TFF reforms nearly wholesale—including the $200 million increase to the GEB—it has never yet attempted to assess Nunavut’s true expenditure needs, nor those of the other two territories.

Yet a few years later, with TFF reforms well behind it, Ottawa published its vision for the North as a place where self-reliant individuals live in healthy communities, and where responsible governments are contributing partners in Confederation. But if Ottawa’s own appointed experts were unconvinced that the least-favoured of the territories receives enough federal support even to provide acceptable public services, then how does Ottawa propose to finance its grander vision for the North as a whole?

Connecting political vision and fiscal reality in the North

Seven years after Braden cautioned Ottawa against attempting to reform TFF without a clear idea of what it wanted TFF to achieve, his advice still seems pertinent. Although Ottawa has now drafted a vision for the North, its vision appears detached from fiscal reality. There is little sense of how Ottawa intends to finance the North that it envisages, and it is unclear whether the fiscal mechanisms already in place are enough to cover the costs. By far the largest of these mechanisms, TFF is arguably insufficient even for the fundamental purpose of providing comparable public services at comparable levels of taxation, let alone for preparing the ground from which Ottawa’s vision for the North could grow.

This fiscal uncertainly casts considerable doubt on Ottawa’s own convictions. Braden suggested to the O’Brien Panel that Ottawa was in fact vacillating between two competing visions for the North. The first, exemplified by Ottawa’s dilatory approach to devolving jurisdiction over lands and resources to the territories, was a narrow vision of the North as primarily a national space. Northern resources would be developed for the benefit of the federal government and Canadians generally, and the territorial governments would remain dependent on Ottawa both fiscally and constitutionally. The second, exemplified perhaps by former Prime Minister Paul Martin’s controversial off-the-cuff remarks on territorial evolution, was a much broader vision of the territories as “provinces in waiting.”23 Revenues from Northern resources would flow to territorial governments, so that each territory could become more self-reliant, self-sufficient and, as Braden put it, “get on with life as a province in all but name.”24

While Ottawa’s present vision for the North does not include creating new provinces, its emphasis on the territories as “significant contributing partners” to Confederation seems to suggest it would prefer self-reliant territories to dependent ones. Yet the section of Canada’s Northern Strategy devoted to “improving and devolving Northern governance” does not even mention resource-revenue sharing—even for Yukon, which has had a devolution agreement with Ottawa since 2001. From a fiscal perspective, Ottawa’s continued reluctance to share resource revenues gives the impression that its chief motivation is to offset its fiscal support for the territories, rather than to help propel them towards its future vision for the North. Ottawa’s current best offer, which would cap the territorial share of resource revenues at a seemingly arbitrary five percent of GEB, would be especially ungenerous to Nunavut.25

However conflicted Ottawa may be about its true vision for the North, Braden was perhaps overly critical when he predicted that, as a result, the O’Brien Panel’s reforms would be “ad hoc at best.” The reforms improved TFF in important ways, not least by apparently satisfying the express concerns of the territorial governments. Yet Braden pinpointed a genuine problem with the disjointed way that Ottawa seems to approach its fiscal responsibilities in the North. Ottawa’s failure to address the inadequacy of TFF in the face of Nunavut’s extraordinary fiscal challenges, as the O’Brien Panel recommended, casts serious doubt on the durability of the TFF reforms. An assessment of Nunavut’s actual expenditure needs remains conspicuously lacking.

With the TFF renewal deadline little more than a year away, time is short for Ottawa to define more sharply how the North fits into Canadian fiscal federalism, and to develop the appropriate fiscal structures to undergird its vision for the North. Respecting Braden’s advice not to try to create the blueprint for those fiscal structures here, it nonetheless seems clear that this work should include the following steps:

Ottawa should begin by recalling Braden’s point that, as the senior government, it has a special responsibility to help advance the territories towards its vision for the North. It should take care not to assume—as the lack of attention to fiscal matters in Canada’s Northern Strategy suggests—that the federal-territorial fiscal status quo is sufficient. Ottawa’s analytical capabilities greatly exceed those of the territorial governments. They would be hard-pressed to prove to Ottawa that they require increased federal fiscal support if Ottawa itself were not already receptive. For example, the O’Brien Panel’s recommendation to address Nunavut’s true expenditure needs was infeasible without Ottawa’s engagement, no matter how much Nunavut may have desired it.

Ottawa should connect its vision for the North with a long-term fiscal plan. It should seek the cooperation of the territories in developing this plan, which should be sensitive to the considerable social and economic differences between them. The territories should also subject their own joint vision to the same fiscal discipline, and all governments should then communicate frankly with Northerners about priorities and trade-offs. Ottawa should be mindful that its spate of delayed, scaled-back or unfunded Northern announcements—among them the deep-water port at Nanisivik, the High Arctic research station and the new polar-class icebreaker—have strained its credibility in this regard.26

Even as it develops this fiscal plan, Ottawa should work with Nunavut to conduct an urgent and detailed assessment of Nunavut’s expenditure needs, and at the very least adjust Nunavut’s GEB accordingly. Nunavut’s social and economic challenges have not lessened since the O’Brien Panel highlighted them. A recent study applying the UN’s Human Development Index to Nunavut ranked it a distant last among Canadian provinces and territories, and put it alongside countries such as Lebanon, occupied Palestine and Paraguay on indicators of life expectancy and schooling.27 The NWT consistently ranked much higher than Nunavut in the same study, but my own update to Zuker and Robinson’s GEB analysis using current data shows that implied demand for public services in Nunavut is still only 11 percent greater than in the NWT. As before, this problematic result strongly suggests that Nunavut’s GEB is too low.

That said, Ottawa and the territories should also be aware that TFF is not a panacea for all territorial expenditure needs. As a fiscal equalization program, TFF is meant chiefly to address on-going fiscal imbalances—whether vertically between the territories and Ottawa, or horizontally between the territories and the provinces. As the O’Brien Panel indicated in respect of Nunavut, TFF was never really designed to address historical fiscal imbalances arising from long-standing deficiencies in infrastructure or socio-economic development. In other words, TFF can enable territorial governments to provide comparable services at comparable levels of taxation, but it works best if they enjoy more or less the same developmental or infrastructural base as the rest of Canada.

For this reason, Ottawa should include other measures in its fiscal plan for the North. One such measure should be an infrastructure fund dedicated to helping the territories catch up with Canada—especially Nunavut, whose infrastructural base is particularly soft. Not only would this type of fund accelerate private-sector growth, it would demonstrate that Ottawa recognizes the large role it once played in promoting economic development in southern Canada, by building or subsidizing critical infrastructure such as ports, railways, roads and the like.

Ottawa should consider other useful fiscal measures, including sharing a meaningful portion of resource revenues with the territories through devolution, further loosening the cap on territorial government debt, and allocating special-purpose funds on the basis of need rather than population. It should also cooperate with territorial governments and aboriginal groups to fulfill its fiscal obligations under land claim and self-government agreements. Thomas Berger’s estimation that fully implementing Article 23 of the Nunavut Land Claims Agreement would require hundreds of millions of dollars in additional funding for Nunavut’s educational system illustrates how strongly these agreements can impact federal-territorial fiscal arrangements.28

Whatever the complete arsenal of measures, Ottawa should be able to explain how they combine into a fiscal package adequate to realize its vision for the North. Neither Ottawa nor the territories will be able to achieve all that they have set out for themselves at once, and they will have to make hard decisions about which goals to finance first. But their visions for the North will always lack a certain amount of credibility unless there is a plausible fiscal roadmap for achieving them.

These steps may seem ambitious, especially in today’s fragile fiscal environment. But Ottawa’s vision for the North is ambitious as well. Perhaps it is too late for Ottawa and the territories to take all of these steps together before the TFF renewal deadline in early 2014. But they should certainly be able to take them before the next scheduled TFF renewal in 2019. If they do not, then lasting solutions to the territories’ social and economic challenges will likely remain elusive—and Ottawa’s vision for the North will surely have proven hollow.

Notes

1. With thanks to Chris Alcantara, Dan Carlson, Josh Gladstone and Graham White for their comments.

2. Advisory Panel on Fiscal Imbalance, Reconciling the Irreconcilable: Addressing Canada’s Fiscal Imbalance, Report to the Council of the Federation (Ottawa: The Council of the Federation, 2006), 55-56 and 63-64.

3. George Braden to Michael Percy, Ottawa, 30 August 2005, Submission to the Expert Panel on Equalization and Territorial Formula Financing, 2-3.

27. Elspeth Hazell, Kar-Fai Gee and Andrew Sharpe, The Human Development Index in Canada: Estimates for the Canadian Provinces and Territories, 2000-2011, CSLS Research Report 2012-02 (Ottawa: Centre for the Study of Living Standards, 2012), 68-73.